3 Simple Charts Show Why Discover Is a Buy Today

Discover Financial Services has long had a number of compelling reasons to be compared to Citigroup and American Express. The company has decided to reveal even more.

May 27, 2014 at 12:50PM

Looking for a new investment to consider? Discover Financial Services (NYSE:DFS) recently revealed three reasons why it should be on your radar.

Remarkable profitability
One of the critical considerations with any investment is a company's profitability relative to its peers.

Two key ways to measure this for banks and credit card companies such as Discover is net interest margin (the difference between what it receives from its loans versus what it pays out on from borrowing) and return on average assets (how efficiently it is able to generate profit based on its size).

Discover was at or near the top of the class in 2013 on those two essential measures of profitability when compared against American Express (NYSE:AXP), Citigroup (NYSE:C), and others peers in the credit card industry:


The difference between Citigroup and Discover here is even more staggering when you consider that they are essentially neck and neck on net interest margin, but Discover far outpaces its rival in return on assets.

Tremendous growth and safety
The natural questions then become, with it being so profitable in 2013, how did it fare during the financial crisis, and is its profitability driven by risky loans? It turns out, Discover not only outpaced all of its peers in growing its credit card loans after the financial crisis, but did so in a much safer manner:


Discover's credit card portfolio has more than doubled from $20 billion in 2008 to $51 billion in 2014, even as its peers have continued to see theirs decline.

But with any growth -- especially in credit cards -- there is always concern that it results from taking on more risk. However, Discover continues to have an incredibly safe customer base by charging off fewer loans relative to its peers.

When a financial institution can outpace its peers in loan growth in a safe and secure manner, investors should take notice. 

A powerful brand customers love
Moving beyond the balance sheet and income statement, Discover also revealed it has the highest brand awareness, along with the most loyal customers:


More people are familiar with Discover than American Express, which is astounding when you consider that it had just $717 million in marketing expenses in 2013, versus $3 billion at American Express. And it far outpaces Citigroup and other banks commonly thought to be better known.

When you add in its remarkably loyal customers, who are likely to have their cards for 50% longer with Discover than its peers, this shows it isn't simply good at marketing, but actually in retaining its customers. This is part of the reason why it has been so profitable through the years.

The takeaway
When you combine tremendous profitability, great growth, limited risk, loyal customers, and a powerful brand, Discover fits the bill as a buy today.

Your credit card may soon be completely worthless
While Discover undoubtedly is a worthy consideration, there is one big risk to the entire credit card industry. And that is the fact the plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Patrick Morris owns shares of Discover Financial Services. The Motley Fool recommends American Express. The Motley Fool owns shares of Citigroup and Discover Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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